Best Buy Off 7%: Citi Sees Further Margin Erosion

By Tiernan Ray

Shares of Best Buy (BBY) are down $1.66, or almost 7%, at $23.30 after the company this morning reported fiscal Q2 revenue and earnings per share below estimates, but raised its year EPS view based on expected share repurchases.

Revenue in the three months ended in August was about the same as the year-earlier period, at $11.35 billion, missing analysts $11.52 billion consensus.

Same-store sales fell 2.8%, year over year.

EPS of 47 cents was down 22% from the prior-year period and missed the consensus 53 cents.

The puts and takes in sales were familiar: “mobile computing, tablet computers, appliances, and “eReaders” all did well, while television, gaming, digital imaging and physical media sales were all weak, the company said.

For the full year, the company reiterated an outlook for $51 billion to $52.5 billion in revenue, which is slightly below the $52.1 billion average estimate on the Street.

On the profit side, the company said it now expects EPS in a range of $3.35 to $3.65, up from a prior $3.30 to $3.55, largely as the result of an expected $1.5 billion in share repurchases this year, which will contribute 20 cents to 25 cents per share to earnings.

Without that buyback, the EPS range, in other words, would have been lower than the original forecast.

The company said comparable store sales will range from down 3% to flat with the prior year.

In a note to clients today, Citigroup’s Kate McShane reiterates a Sell rating on Best Buy shares, writing that the decline in gross profit margin of 0.4 percentage points was about twice as bad as she’d expected, driven by heavy promotions activity.

McShane suggests gross margin will further deteriorate: ” We see further GM% pressures going forward given 1) the company continues to face a challenged & highly price sensitive consumer and 2) the lack of a compelling product cycle in larger ticket (higher GM%) segments (FPTV).”

Mind you, McShane concedes that with an outsized free-cash-flow yield, Best Buy could do a lot of buybacks to prop up its stock.

Update: During a conference call with analysts this morning, management remarked that gross margin trends the rest of the year should actually improve. In contrast to the 50 basis-point decline in margin in the first half of the year, the company expects that for the full year “our gross profit rate will be modestly down.” The company attributed the improvement to “improved performance in mobile phones, based on anticipated sales increases and solutions attach, improvements in gaming driven by stronger title releases and a higher mix of pre-owned gaming software, and improved attach rates and solution sales in our mobile computing space.”

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.